Forms of Money

Money, as a medium of exchange in our economy, takes two primary forms—cash (coins and paper notes) and checking accounts. Our money is measured in dollars and cents, and these are what we use as our unit of account.

Everything in our economy has a price in terms of dollars and cents. We use our money as the form of payment to acquire goods or services. And we have been able to establish a very effective and efficient exchange process.

One form of making a payment is to use cash you have on hand. A much more common process for making payments, especially large payments, is through the use of checks. By using checks, we are able to use the funds we hold as checking deposits in financial institutions.

Checkable deposits, are a somewhat different form of money from cash. Checkable deposits represent money and serve as a medium of exchange because, through the use of checks, they are readily accepted as payment for goods and services.

We also use money for the other role we discussed, as a store of value. If we do not use our money for current transactions, we can save it by placing it on deposit at a financial institution.

There are different kinds of savings deposits. There are term deposits where people deposit funds for a fixed, agreed-upon period of time such as one year, two years, five years, and so on. These savings deposits are not usually available for spending until the end of their term.

There is one other form of payment that is used to acquire goods and services — credit and the use of credit cards. This brings us to a key distinction, that is, the difference between what serves as money in its function as a medium of exchange and the process by which exchanges take place. Checking account deposits are money. Checks, on the other hand, are a process by which to make payment and access the money in those accounts. Deposits represent the money. The check represents the process.

Credit cards are a process of payment. They are a means by which you can make a purchase. In using a credit card, you are activating a loan and borrowing funds to make a purchase. You aren’t using your money. You are using someone else’s. You are, in effect, borrowing. The card is the process by which you borrow. The borrowed funds, not the credit card, are the money.

Eventually, you must use your own funds to pay back those that were borrowed by using the credit card. All the credit card does is enable you to use an institution’s funds for a period of time, after which you will have to use your own funds to pay back the institution. A credit card is a process of payment that enables you to use money you don’t yet have. It isn’t money itself. It allows you access to funds that you will eventually have to pay back to the creditor.

Another card you may have heard about is the debit card. Although not yet widely available, the debit card, like a check, is a process by which you can access your funds for payment. By presenting your debit card to a retailer, for example, you enable the retailer to access your funds directly through a computer hook-up. Unlike a credit card, a debit card does not mean you are using someone else’s money. With a debit card, you are using your own money.

Funds are taken directly from your account. Debit cards are a substitute process for checks, and they eliminate any delay in transferring funds from your account to the account of the retailer to whom you are making a payment.